February 26, 2009

Student Blogger - The Myths of Consumer Protection Law

Update: Audio of this talk is now available and video is embedded after the jump.

Professor Omri Ben-Shahar spoke on the
"Myths of Consumer Protection" at this year’s annual Ronald H. Coase lecture
for first year law students. Ben-Shahar discussed why he believes the modern
consumer protection movement is largely misguided. Consumer advocates cite
three things that consumers need: information about products, access to courts,
and remedies for wrongs done to them. In the eyes of the consumer advocate, a
consumer cannot compete with large corporations without these three things. It
would be David versus Goliath; and Goliath would always win.

Myth
#1: Consumers will be better off if they have more information

Warning labels are on everything. You can’t install a piece of
software or use a web site without checking some box guaranteeing that you have
read the Terms of Service. Do these forms of disclosure benefit consumers?

Ben-Shahar believes not. Disclosures of
information are often technical and hard to digest. People do not want to spend
the time to read these disclosures. In a study of online viewing habits, 1/1000
people actually read a site’s Terms of Service, and that single curious
individual only glanced at the complicated contract for an average of forty
seconds—perhaps just a misclick.

People would rather just be told if a
product is “good.” They do not have enough time to digest technical information
on all aspects of a product. A comparative rating service (for example, Zagat or Consumer’s Digest) is likely to
be much more useful to a consumer. Unfortunately, mandatory disclosure laws do
not and cannot facilitate this information. Mandatory disclosure laws require
disclosure of specific facts and cannot disseminate the more subjective
determinations desired by consumers. Too much mandatory disclosure may even be
harmful by desensitizing consumers to warnings that may be helpful.

Disclosure may be useful to the extent
that these rating services, or other trusted sources, rely on that information.
However, it’s not clear that the disclosure laws would even benefit these
sources. After all, these sources specialize in collecting and digesting
information. They do not require disclosure because they get the information in
other ways.

Myth
#2: Consumers need access to courts

Many boilerplate licenses—standard
contract terms that are often reused—require mandatory arbitration or place the
forum to settle abuses far away. These provisions make litigation an infeasible
choice. The consumer protection advocates believe everyone deserves their day
in court, making these types of contracts unenforceable. But even if we had
broad freedoms to sue, would it help us?

If everyone had the freedom to sue, some
would exercise that right and others would not. The people exercising their
right to sue for inadequate consumer products would raise the products’ price.
People who do not utilize their right to sue would have to pay this higher
price, in effect subsidizing the litigious group.

It seems intuitive that only people who
are informed of their legal rights will exercise them. Those that are informed
would likely tend to be the affluent and wealthy users. Thus, instead of
helping the class of people that consumer advocacy is most protective
of—uninformed and poor consumers—broad legal rights serve as a subsidy from the
have-nots to the haves.

On the other hand, legal rights to sue
for inadequate products may deter businesses from pursuing illegitimate
tactics. This would benefit all consumers. But this assumes that litigation is a
good mechanism to distinguish the unfair and deceitful practices. Many
observers believe that the outcomes of consumer protection suits are impossible
to predict, undermining any desirable deterrent effect.

Myth
#3: Consumers need special remedies for these suits to be worthwhile

Individual suits are probably not worth that
much money because the underlying products are not worth that much. To even
make litigation an option, consumer protection laws may have to provide extra
damages (treble damages, fixed civil damages, etc).

But what if we went the other way? What
if, instead of increasing legal sanction, we were to eliminate them altogether?
If consumer have no monetary recourse against businesses, would things be
worse? Not necessarily, claims Ben-Shahar. There are other ways to protect the
integrity of the consumer bargain. For one, consumers can insure against the
loss of the benefit of the bargain, through various intermediaries (like Square Trade) and even through
insurance companies. Moreover, reputation can do much of the work. A typical
person that feels aggrieved over their treatment by a company would share their
experience with others. They would spread the word that the company does not
provide a good product or service to consumers, so that other consumers will
not make the same mistake. This harms the company’s reputation and may have a
greater effect on the company’s behavior than a lawsuit would. From a
corporation’s perspective it’s better to refund one customer who complains than
to lose two future customers due to word-of-mouth.

Extra damages for consumer protection
law violations would shift resources from one type of enforcement (reputation)
to another (litigation). If reputation is a greater deterrent against unsavory
corporate practices, which seems plausible, then more litigation is not a good
thing. Reputation also seems more effective because it can deter companies from
making poor quality products (relative to their price), whereas a law suit
based on the claim that “the product wasn’t worth what I paid” probably won’t
succeed.

Comments

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An often overlooked fact is that our health care system impacts our tort system. A person without health insurance who is injured by a product must look to the manufacturer's insurance to cover the medical bills. If we had universal health care, consumers would not need to be able to sue to recover their medical expenses and in most cases the matter would end there as the remaining damages would not be worth pursuing.

That of course leaves the policy question of whether or not a reformed health care system should have some recovery right against the manufacturer. I'm inclined to say no, but reasonable minds can differ. Perhaps there is experience to be considered from other countries.

Prof. Ben-Shahar, errs by stating that Reputational remedies outweigh Litigational remedies for consumer damages. That may be true in more homogeneous societies like Japan. The US is more materialistic and reputational damages have less impact than those financially imposed by litigation. I don't consider this a good outcome.

Yet in a study of did comparing US and Japanese corporate methodologies for optimizing manufacturing operations I found that the Japanese included a term for "losses to society" for bad product while US firms did not. This led to lower emphasis on quality. If there was no price for poor quality, either statutory or litigation based, then the process was calculated to optimize near term returns. Witness the environment, the quality of automobiles and numerous other examples.

Litigation is the US way of incorporating "losses to society" in optimizing manufacturing and related industries. Without it we end up with poorer quality and less safe products. That is too bad, but at this time I see no alternative.